Economy set to shrink 1 percent in 2009

LONDON (Reuters) - The British economy is already in recession and will contract by one percent in 2009, a forecasting group said on Monday.

The Ernst & Young ITEM Club, which uses the finance ministry's economic model to make its forecasts, said the economy had deteriorated dramatically in the last quarter.

It predicted in its autumn forecast that the economy will contract for three further quarters before bottoming out in the second half of next year.

GDP will fall by one percent next year, the first year of negative growth since 1992, and will grow by only one percent in 2010, it predicted.

The forecast is in line with a Reuters poll, published last week, which found that most economists believe Britain is already in recession and its economy will shrink in 2009.

A preliminary estimate of third quarter gross domestic product is due to be released on Friday and is expected to show that the British economy shrank between June and September after stagnating in the second quarter.

Peter Spencer, chief economist to the ITEM Club, said the economy had been seriously weakened by "recent dramatic events."

The global financial crisis has forced the government to nationalise two banks and provide 37 billion pounds of taxpayers' cash to bail out three others.

"The effects of the credit crisis are spreading out from the financial and housing sectors and impacting every part of our domestic economy," he said in a statement.